In May, Royal Bank of Canada declared new fees for account holders in the Eastern Caribbean and Trinidad. They were met with waves of anger and account closure, but the fees are here to stay.
RBC is not the first bank in the region to raise fees over the wailing and lamentations of their customers. CIBC Firstcaribbean did the same in 2011. These increases are not reserved solely for the smaller islands; the Jamaica Observer also did an article in 2010 showing how fees skyrocketed in the space of a year. RBC tried to raise fees in Canada in 2015; the idea was axed before implementation due to the vocal outrage.
It feels wrong. These same banks in the Caribbean have slashed savings rates to 1% or lower, while lending at rates 6-8 percentage points higher.
Furthermore, it is much harder to open an account. Know Your Customer and Anti-Money Laundering regulations, while laudable for the prevention of crime and terrorism, have raised the barriers to banking for young people now trying to establish their households, as well as businesspersons taking on new ventures of any size in any sector. After all the paperwork to prove and confirm identity, the monthly bank fees eat into the balance being maintained.
Credit cards, a useful device to avoid walking with cash, still have stiff annual fees and/or high interest rates that can quickly drive people into oversized debt. The exchange rates for purchases also factor in further fees for the banks to convert Caribbean currencies into US dollars or euros or British pounds.
Most powerfully, the banks retain ultimate control over what transactions are honoured first. Banks in the USA have faced lawsuits on this matter, having been sued for manipulating the order of transaction fulfilment in order to maximise overdraft and minimum balance fees.
Businesses are not faring any better. Many small businesses in the Caribbean suffer so much from card fees that a minimum spend of US$10 is required to make the acceptance of credit cards worth the fees.
Online bill-pay in the Caribbean is stifled because companies must negotiate agreements with each bank; hence the success of Massy SurePay in Barbados, where SurePay acts as a one-stop financial intermediary between major businesses and the customers. Online, Paypal has an opportunity to foster a monopoly as the electronic payment processor of choice for Caribbean retailers for much the same reason.
Into this turbulent arena comes a technological innovation - a protocol for distributed, peer-to-peer transaction databases called Blockchain - and a new currency based on this technology called Bitcoin.
What are Bitcoin and Blockchains?
Bitcoin is an electronic currency developed between 2007-2009 by an unknown entity that referred to themselves as Satoshi Nakamoto and based on the Blockchain protocol, developed during the same period by the same entity. Since 2009, the currency has been adopted and maintained by a number of key, publicly-disclosed developers. Its adopters hold lofty expectations for Bitcoin to revolutionise finance, including:
- reduction of transaction fees;
- improvement in transaction security and record-keeping;
- reduction in cost of ownership for the unbanked, i.e. persons or businesses not serviceable by current banking standards, and
- decentralisation and democratisation of economies.
The premise of Bitcoin is not simple, which has prompted rigorous economic examination and development of both the currency and the Blockchain protocol; this guide specifically presents the knowledge for the edification of lawyers.
Essentially, the currency is based on bitcoins - a limited, non-inflationary electronic resource. To generate or mine new bitcoins, computing power is dedicated to solving complex mathematical equations; new bitcoins are rewarded to the machine responsible for completing the equation. With a predetermined, declining reward system, plus heavy demands on computing power and electricity to solve increasingly complex mathematical equations, only 21 million bitcoins will ever be made available. This limit ultimately gives Bitcoin its worth - currently hovering between US$650-700 at the time of this article's publication.
The Blockchain protocol defines the method of creating, sharing and storing a chronological, peer-to-peer, distributed transaction database. As Bitcoin is based on the Blockchain protocol, all of the currency's transactions are timestamped and collected into blocks that include the equations to be solved. Once solved, the blocks are added to the Bitcoin blockchain - a transaction ledger that records every transaction made since the currency's inception. Copies of the blockchain are maintained by and replicated to every single machine running the full Bitcoin mining software; this, combined with the complex equations, makes it very difficult to change the ledger once transactions have been recorded.
To send and receive Bitcoin payments, users install a software application that acts as an electronic wallet. The wallet records the transactions specific to the user.
Since the inception of Bitcoin, many alternatives to the currency - also known as altcoins - have been established on the Blockchain protocol. The protocol has proven particularly fascinating to computer scientists, record-keepers and financiers as a new method for maintaining records and transactions with the following features:
- lower processing fees;
- less human intervention;
- increased security, and
- increased reliability.
Why Bitcoin Should Matter to the Caribbean
Essentially, Bitcoin is, for the Internet, what Vodafone's M-Pesa has become for mobile phone providers in East and South Africa. With the drastic increase in smartphone use in the Caribbean, along with the growing preference for data plans, Bitcoin can easily act in an similar capacity in this region.
Legal transactions constantly flow between the USA and various Caribbean countries in the range of US$100 to US$5000. The transaction fee therefore ranges from a minimum of US$15 (paid by both parties if done in a bank) up to US$500 if done through Western Union. The transaction itself can take from 24 hours up to a week to fully process.
Now re-frame this situation if Bitcoin is available through a mobile provider, or even a separate finance company. If I send money to a relative for college expenses (say, US$2000), I can go to this company, buy the bitcoins at the current rate, use my wallet on my smartphone to send it to my relative's wallet, where he can sell the bitcoins at the going rate to collect his money.
If the transaction takes 5 minutes with a 1% fee, the price of bitcoins should have barely fluctuated, leaving my brother with US$1980 to spend, rather than receiving between US$1500 - US$1940. This transaction may even factor in all the KYC/AML that both of us would provide - most mobile providers already ask for the same information to start a post-paid plan. Even for those who lack the ability to fully comply with KYC/AML, a cheap, pay-as-you-go sim card and reduced transaction amounts or frequency (but not speed!) should be enough to meet most needs.
This dynamic only works if the transaction moves quickly. If a transaction takes 5-24hrs, increased fees will be necessary to raise the priority of the block – or the worth of bitcoins fluctuates much more, which may unwittingly tax the transaction upon conversion to fiat currencies. Either scenario would see consumers turn back to the banks and Western Union, despite the current decrease in goodwill.
The Blockchain protocol extends the potential uses far beyond remittances; I will posit some region-specific applications of this technology next time.